spot trading-
Spot trading is a popular trading method — but how is it different from futures and options trading? And what risks do you need to consider before investing in spot markets?
Spot trading is one of the most basic ways to trade or invest in crypto. Many new investors and traders start their crypto journey by interacting with the spot market.
In this article, CMC Academy dives into what spot trading is, how to trade spot markets, and its risks and benefits.
IN CRYPTO -
Spot trading is a simple concept in which traders buy crypto assets and wait for them to rise in value. For example, when trader Sue buys a position in Bitcoin, she hopes that she will be able to sell it for profit at a later stage.
In spot trading, you buy the asset with your own money. This means you can only buy as much as you can afford, and nothing more. For this reason, it is considered relatively safer than other trading markets. In the worst-case scenario, you lose all the money you invested. Other trading methods, such as margin trading, can cost you even more. In this market, even when the token becomes worthless, you will never be forced to sell.
How do you profit from here?
Generally, spot traders buy assets, like cryptocurrency or stocks, at a low price and wait for their value to increase before selling them. Because of the nature of spot trading, this method of investing allows you to hold your tokens for multiple years.
Many traders use spot markets to dollar-cost-average into their favorite cryptocurrencies and wait for the next bull market to realize their profits. Since most crypto coins eventually go up, patient traders generally make good profits.
It is important to remember that the profits only become real after you sell your crypto for fiat currency or your stablecoin of choice.
In traditional markets, buying stocks also generates profits in the form of dividends, where companies distribute a portion of their earnings to shareholders.
Is Spot Trading the Same as Buying?
Spot trading and buying are often used interchangeably, but buying does not cover the charge of spot trading completely. Firstly, a trade is not complete until a sales transaction is made, and profits or losses are realized. Moreover, what differentiates spot trading from “buying” is that it only allows you to use the capital you already have access to. You cannot borrow money from a brokerage or exchange to trade in this market.
Difference Between Spot Trading and Futures Trading-
As discussed, spot markets allow you to purchase assets with immediate delivery, so you can wait for the price to increase. Futures trading works differently because you do not own the underlying asset. Instead, futures merely represent the value of an asset. When trading on the futures market, you agree to buy or sell an asset on a future date, at a predetermined price.
Contrary to spot trading, futures allows you to short the market and use leverage on your trades. These tools can help you make money in the short term, while spot trading is generally more suited for long-term trading.
When a futures contract reaches its expiry, the buyer and seller usually agree to settle the trade in cash, rather than actually exercising the contract.
